MB and Gang:
I've been up to my ears in work of late and have not had a chance to join the thread. Fortunately, I am going to take some time off for the next while, so will be able to participate more actively over the holidays.
Here are a few observations that might be helpful to some of our group.
Back in August, following an intensive summer field research effort, I posted a piece (#83134) that forecast an extremely ugly autumn for the tech sector. In that post, I provided a number of observations that backed my dour view. Unfortunately for the vast majority of investors, that set of predictions proved accurate and we have experienced a severe contraction in tech stock valuations.
While I am delighted that the forecasts I made at that time proved accurate, I am truly sorry to see the carnage that the market's contraction has inflicted on the majority of retail investors. Yes, one could argue that they got what they deserved for driving share prices into never-never land, but there is little solace to be taken as one watches much of the continent's already meager savings get wiped out.
Today, many retail investors are convinced that we are at or are very close to a "bottom". The field evidence suggests that this is but wishful thinking. I can see absolutely nothing to suggest any respite from the marauding bear.
Back in August, while the posted "worry list" was extensive, the key points revolved around an intensifying recession spreading across Asia, a "Fed" that refused to turn off the money printing presses, and above all else, a relentless expansion of tech sector inventories. Finished goods piled to the ceilings as well as the incredibly stupid triple ordering and hoarding of semi products by manufacturers (remember the supposed "shortage of semis" story that was promulgated by every N./Y. based analyst during the summer?) provided ample evidence that we were in for trouble this past fall, especially with corporate sales having fallen off the graph and the consumer finally cutting back on his manic borrowing.
Unfortunately, inventories are now in much worse shape than they were last summer. This autumn's selling season has been lackluster and the all-important Christmas sales period has been disappointing. It is now inevitable that tech-related inventories will be at record levels as we move into the early winter sales doldrums.
For quite some time, I have pounded away at the point that the PC market was saturated. In August, I noted that the cell/digital phone market was also approaching saturation. For any who might wish to question those observations, I can only say go visit some stores or distributors. And since PCs and cell phones soak up most of the semi products, to whom do all those still over-valued semi manufacturers sell their products?
Near a "bottom"? Not by a long shot. Most funds, as well as the general investing public are now trapped as a result of massive over-ownership of tech stocks. Tech sector earnings have been artificially inflated as a result of "aggressive" (in some cases, fraudulent) accounting, as well as through the sale of dot com investments. Both of these unseemly practices are coming under pressure, just as actual earnings are being crushed. The tech sector must wade through several quarters worth of ugly "warnings", nasty financial results and considerable contraction and consolidation before a bottom will be found.
In the end, profitability still defines stock prices. Real profits have been a rarity in many tech companies (as most have been forced to spend sums that far exceed their free cash flows on never-ending research and capital equipment investment, just to stay in the game). Saturation of addressed markets is just beginning to extract a toll, which in the end will be much worse than most investors can conceptualize. The tech sector bear is in its infancy.
Incidentally, have a good look at the optical stocks. They are about to take it in the neck as the public comes to recognize that the build-out of optical networks was vastly over done. and that the growth in this sector is coming to an end. Also examine the "contract manufacturers". What happens to their growth as their contracts get cut back dramatically this winter? Most operate on minuscule margins. Their fixed costs are large. Most will find it difficult to reduce their operating costs to align with their plunging order books. Their PEs will be stripped near term.
Best, Earlie |
